Everything to know about REITs
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In the most simple terms possible, Real Estate Investment Trusts are companies that own, operate or invest in Real-Estate and sell stock in their company. These can be bought on major exchanges much like that Apple stock you’ve been holding on to. In a way they mimic mutual funds, but instead of buying Tesla and Zoom they buy properties. REITs allow you to invest in certain types of real estate without having to buy the actual property! Also, because most REITs are widely traded, they are a more liquid investment that actually buying property.
Types of REITs
Equity REITs: These are the REITs that hold property. It is safe to assume when talking about REITs you are talking about equity REITs unless otherwise specified. Equity REITs can take on many forms. There are REITs that hold every type of real estate you can think of:
- Residential REITs
- Office REITs
- Industrial REITs
- Healthcare REITs
- Retail REITs
- Infrastructure REITs
- Data Center REITs
- Hospitality REITs
- Diversified REITs
How do they make money? Most of these companies make money buy leasing their underlying properties and that money is then paid to REIT shareholders through dividends. To be considered a REIT, 75% of gross income from rent. mortgage interest, or selling property must be paid to shareholders.
Mortgage REITs: are different from Equity REITs. Instead of holding physical property in their portfolios, they hold mortgages which are lent out. These make their money from the difference between the rates on funding they get(lower rates) and the funding that they give out(higher rates).
Comparative Performance and Risks
U.S. Equity REITs have performed competitively with stock overtime as can be seen from the following:
There are of course some risks to consider. The first, as interest rates rise the demand for REITs decreases as investors go towards the bond market. Historically, REITs have not performed well in periods of inflation. Also, the specific nature of certain REIT portfolios can expose them to risk. For example, retail REITs that own malls and other stores are more exposed to the effects of the COVID-19 outbreak than say REITs that own warehouses and distribution centers. This risk can be mitigated by buying into a wider range of REITs which bring us to the next topic.
How to go about buying REITS
If REIT investing sounds like a goof fit, we encourage you to speak to an advisor who can help to pick and analyse suitable REITs. In addition to individual REITs, there are also REIT Mutual Funds and REIT ETFs that can help you to diversify. Once you know what REITs investment you want, the majority can be bought on publicly traded exchanges just how you would buy individual stocks.
They’re are some exception of non-traded REITS which you will need to purchase through a broker or advisor.